I’ve said before that I think Japan will be the next sovereign debt domino to fall, and the news this week certainly supports that view. In fact, Japan is moving ever closer to the likes of Greece in terms of its precarious fiscal position.
Since 2008 Japan’s debt has increased by 61% of GDP. That compares to an average among OECD economies of 39%, and just 8% for ‘A rated’ sovereign nations. Japan’s public debt is expected to reach 239% of GDP this year – an unprecedented level for any major economy in peace-time.
Japan does hold a substantial amount of foreign bonds, however even taking these into account net debt in the country is still 137%. This puts Japan uncomfortably close to Greece. According to data from Eurostat, the European Union’s statistical agency, Greece’s debt is currently 159% of GDP.
On Tuesday this week ratings agency Fitch downgraded Japan‘s credit rating two notches to A+, citing a surge in public debt and the lack of any plan to restore fiscal probity.
It’s clear that Japan has decided that the solution to its chronic levels of debt is to print more money. Indeed, Dylan Grice, global strategist at Societe Generale, said recently that, “Japan’s addiction to public sector spending is way beyond the boundaries of remedial ‘austerity’… Political pressure on the Bank of Japan to crank the printing presses into top gear will become irresistible. We see no alternative.”
Incredibly, despite Japan’s precarious fiscal position, the popular press continues to refer to the Japanese Yen (JPY) and Government bonds (JGB’s) as “safe-havens”. Personally I consider them to be some of the riskiest long-term investments around, and it is highly likely that they will soon make excellent short candidates.